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November 08, 2016

By Richard Rubin

The IRS isn't doing enough to monitor the use of virtual currency, the agency's inspector general said in a report Tuesday.

There is "little evidence of coordination" between different parts of the Internal Revenue Service on policing virtual currencies such as bitcoin, according to the Treasury inspector general for tax administration. As with cash, the anonymity of those digital transactions can aid taxpayers who want to hide payments from tax authorities.

"Until a comprehensive virtual currency strategy is developed, the IRS is open to the risk that undetected noncompliance of virtual currency taxable transactions will result in an increase" to the gap between taxes paidand taxes owed, according to the report.

In 2014, the IRS issued its first guidance to taxpayers on virtual currency and the agency's criminal investigations arm has worked on such cases. Virtual currencies are still a relatively small piece of the world economy. There are $11.3 billion of bitcoin, according to CoinDesk, a news site that tracks the industry.

The IRS determined that bitcoin and other virtual currencies should be treated as property for tax purposes. As a result, someone who uses it to purchase items can trigger capital gains on the difference between what he paid and what it was worth when used. Depending on the circumstances, those gains can be taxed at lower rates, while the ability to deduct losses is limited.

That guidance, however, wasn't followed up with details that would help taxpayers track their cost basis in their virtual currencies.

"The public may not understand that each purchase of consumergoods with a virtual currency could result in a reportable tax transaction," the report said.

In its official response, the IRS agreed with most of the inspector general's recommendations but said it didn't think some changes, such as altering certain tax forms, were an effective use of the agency's limited resources.